As a big year for unit titles law has come to a close (see ‘Big changes for bodies corporate and their managers’), we have chosen to revisit a common complaint of purchasers which, in broad terms, relates to the purchase of a unit in a building that turns out to be ‘a lemon’ in one way or another. The more common complaints centre around buildings that are leaky or have earthquake issues. But similar complaints might also arise from other defects or maintenance issues affecting the building or the common property.

This article focuses on two recent judgments from the Court of Appeal which just so happen to relate to the same apartment building affected by watertightness issues (‘the Building’).¹

These cases involve two separate vendors who sold their apartments to two separate purchasers respectively. It was later discovered that the extent of the leaking and damage to the Building was quite severe and both purchasers commenced separate proceedings with quite different trajectories and results. Despite these cases concerning apartment buildings, the lessons learnt can apply to other unit title properties such as commercial ones.

Summary of lessons learnt

Before we look more closely at the two cases, the following is a summary of the key lessons learnt.

For purchasers:

1. Do your homework on a building before buying a unit in it. You are not only buying the unit, but also a share in a building and all common property owned by the body corporate. You will be liable for any current or future levies for routine maintenance and also major maintenance works, such as fixing past and future issues caused by defects, leaks or earthquake damage and capital works to upgrade and guard against such issues in the future. 
2. It is strongly recommended that you obtain a building report before going unconditional on a purchase, not only for the unit but also for the building generally. Alternatively, and for the reasons covered in the case summaries below, your lawyer could draft something to ensure that your ability to be fully compensated for your loss is not diminished if you do not want to obtain a building inspection of the whole building before going unconditional.

For vendors:

1. When marketing a unit, disclose all information relating to the unit, the building, the common property and the running of the body corporate. This is not just the information required by law under the Unit Titles Act 2010. This extends to all body corporate meeting minutes, committee meeting minutes and informal correspondence with the committee or the body corporate manager. As a vendor, you could be held liable for a purchaser’s losses caused by a failure to disclose anything you know about the building even if seemingly minor – a much higher standard of liability than the ‘buyer beware’ presumption that applies to vendors of freehold property.
   Also see ‘Big changes for bodies corporate and their managers’ regarding the beefed-up disclosure regime that will be coming into force on 9 May 2023.
2. Make sure that you read and fully understand the warranties that you are giving under clause 8.2 of the ADLS/REINZ Agreement for Sale and Purchase. Seriously consider deleting or asking your lawyer to amend the warranty in clause 8.2(7) which places wide-ranging liability on vendors for things that might go wrong even after the sale has settled. 

A warning to unit title purchasers

The first case relating to the Building serves as a warning to unit title purchasers. A prospective purchaser of an apartment in the Building was sent pre-contract disclosure information which included the minutes of the annual general meetings of the body corporate for the last three years, the financial statements for the last three years and the Building’s long-term maintenance plan. Two days later, the purchaser entered into a conditional agreement to purchase the apartment. The agreement was conditional on the purchaser’s approval of a land information memorandum (‘LIM’) and being satisfied with the information contained in the body corporate minutes and financial records for the preceding three years. However, it was not conditional on obtaining a building report and a building report for the Building was never obtained. 

The LIM report which the purchaser was provided indicated a possible weathertightness issue. When asked, the body corporate manager (a third party management company) stated that the Building did have weathertightness issues but these only related to the walkways and had since been rectified. The purchaser relied on these statements when going unconditional. It was subsequently found that these statements were misleading and false. The Building’s monolithic cladding system had failed and the weathertightness issues were severe.

The High Court awarded damages to the purchaser, payable by the body corporate manager – not the vendor or the body corporate. However, the damages were subject to a 15% deduction due to contributory negligence due to a failure to obtain a building report in relation to the Building. The purchaser appealed the High Court decision, but only to have the award of damages reduced further. The Court of Appeal held that a reasonably prudent purchaser would have obtained a building report for the entire building (not just the unit being purchased). The purchaser contributed to their own loss, as a building report would likely have identified the weathertightness issue. Therefore, a reduction in damages was justified. The Court of Appeal went further and replaced the reduction in damages due to contributory negligence from 15% to 40%.

This serves as a caution to unit title purchasers to take basic precautions to protect themselves against leaky building issues and other problems. Such precautions include obtaining the body corporate minutes and a building report for the entire building prior to purchasing, even though it might not be practical for a building inspector to inspect the condition of all building elements within the usual scope and cost of a residential builder’s report. Contractually, it may also be feasible to negate the possibility of the same outcome by providing that the purchaser’s rights and entitlements will not be reduced for failure to obtain a building report.

A warning to unit title vendors

The second cautionary tale relating to the Building serves as a warning to unit title vendors. This judgment concerned the broad vendor warranty at clause 8.2(6)(a)standard ADLS/REINZ Agreement for Sale and Purchase (9th Edition), which states:

… the vendor has no knowledge or notice of any fact which might give rise to or indicate the possibility of the owner or the purchaser incurring any other liability under any provision of the Act or the Unit Titles Act 1972…

This warranty is substantially the same as clause 8.2(7)(a) in the current 11th Edition.

Prior to entering into the agreement in this case, there had been individual instances of leaks and water ingress which the vendor was aware of. However, the diagnosis of the Building’s systemic weathertightness issues occurred after the sale. Ultimately, the Court of Appeal found that the vendor did not have sufficient knowledge of the wider watertightness issues to trigger the warranty. However, the Court interpreted the warranty very broadly – in a way that should be of concern to unit title vendors.

It was held that the words, ‘any other liability’, in the warranty were wide enough to cover defects in the whole building rather than just the individual unit. This imposes potentially excessive liability on unit title vendors if they fail to disclose certain information. This position may be contrasted against the position of a freehold vendor who is generally not required to disclose maintenance issues and can instead rely on the ‘buyer beware’ presumption.

As such, unit title vendors should carefully consider whether they want to retain the warranty in clause 8.2(7)(a) in the ADLS/REINZ Agreement or whether they want to amend or remove it to avoid potentially broad liability.

Conclusion

These cases demonstrate the complexities of buying and selling a unit title property. As a purchaser or vendor of a unit title property, there are many additional rights and responsibilities to consider. If you are a purchaser, vendor or anyone else with an interest in unit titles and would like help navigating these issues, please get in touch with our Real Estate team. 

1. Roberts v Jules Consultancy Ltd [2021] NZCA 303; Miles v Gadd [2022] NZCA 227.